Your startup’s most important conversation.
Nothing is more critical to a SaaS startup than its pricing strategy. Let’s talk about why. (Including 72 B2B SaaS Pricing Plans)
(Note: This post originally appeared on the Tapir Zookeeper Blog, where we regularly post about startups, growth, and animal husbandry.)
Spoiler Alert: B2B pricing is hard.
Try to name a billion dollar B2B tech company without a revenue model. Even if you don’t dream of 10-digit valuations, nothing is more critical to a SaaS business than its pricing strategy.
Until recently, I found the imperative to develop a sustainable business model was constantly doing battle with the competing temptation to give the milk away for free.
Oh sure, I justified this temptation with various pretences:
“I need to develop traction first”
“What I really care about is the data”
“If we’re going to compete with the established players, we need to de-risk adoption”
But if I’m being honest, the root cause of the ‘free urge’ was fear — fear of getting pricing wrong, anxiety around rejection, and an unwillingness to commit to my product’s value proposition.
What I’ve come to realize, is that prioritizing the ‘pricing conversation’ is the soundest strategy for evaluating your product’s anticipated product-market fit. In other words, it’s the most important thing that you can do for your startup.
The pricing conversation can be abstracted to two hypothetical customer questions: 1. Is there ANY price that you would be willing to pay for this product? and 2. If willing to pay, what price would you pay?
Now, bear in mind, I have absolutely zero intention of actually asking potential customers these questions.
Why?
Because potential customers are DIRTY. ROTTEN. LIARS.
I’m mostly kidding here, but it’s a fairly well understood fact that “Willingness to Pay” surveys are a waste of time, especially for startups.
No, instead, we’re using these questions as a window to our product’s soul…
1. Is there ANY price that you would be willing to pay for this product?
This question is the fundamental basis of product-market fit (pmf). Paul Graham summarizes pmf as “make things people want.” Steve Blank makes an even more explicit link between pmf and pricing — you know you’ve reached pmf because you’re able to ‘relieve’ customers of their money.
Inevitably, there is some segment of your target audience willing to say ‘Yes’ at free and ‘No thanks’ when they have to pay you (your mom for example). But you’ve only got so many friends and family; that’s not a long-term business strategy. So feel free to offer free trials and go nuts with freemium tiers, but if you’ve got no idea how to entice some segment of the market to actually pay you for your product, I’ve got bad news:
Spending your evenings, weekends, and holidays working on a product that at the end of the day customers aren’t even willing to pay for? That’s banana steaks.*
The best way to figure out if you’ve created a product that people truly want or need? Put a price on it. Any price greater than $0 helps to separate the wheat from the chaff and gets you closer to pmf.
2. If willing to pay, what price would you pay?
Once you’ve rejected the alluring siren-call of ‘free’ this is where things get interesting. While you’re absolutely allowed a pricing Rumspringa in your product’s early adolescence, your time is not unlimited. In fact, three of Josh Pigford’s 4 Signs Your SaaS Business is Dying are specifically related to what you’re charging for your product.
According to Josh, if you want to avoid going gentle into that good night you must:
1) Achieve a minimum Average Revenue Per User (ARPU) of $20;
2) Be able to collect at a minimum $100 ARPU from your biggest customers; and
3) Reach at least $2000 in total Monthly Recurring Revenue (MRR) by your first birthday.
Take a moment to think about those numbers and what they mean for your product, its pricing, and the value you need to offer. I bet at least one of those metrics gives you pause. For me, it was the minimum ceiling of $100 ARPU. Prior to reading Josh’s article, our anticipated pricing was guided by a) what I thought customers would pay and b) what our competitors charged.
In hindsight our first pricing technique seems laughably inadequate. Imagine if Apple started product development by asking themselves, how much will the average person pay for a watch and what do most watches cost?
No, the better question is what would my product have to do—who would it have to be—for people to gladly fork over $20, $50, $100, $1000?
Welcome to the Church of Value-Based Pricing.
Church doctrine can be summarized as:
- Most startups begin by pricing their product based on cost or competition
- Smart startups price their product based on value to the customer
Without diving into Customer Development, suffice to say that in the early days you make educated guesses around value and pricing, and the faster you get it right, the longer you get to live.
Once startups convert to the Church of Value-Based Pricing, a critical sacrament (ok, I’m done with the religious metaphors) is to determine their value metric—essentially the unit you’ll use to tie product value to pricing.
The average B2B SaaS startup charges roughly $67 — $525 per month for a subscription.**
At least initially, we’ve decided to literally bind our pricing to our user value. We’ve chosen event-based pricing, taking a portion of the revenue earned from each referral we get our customers. From there, we’ll put together subscription tiers based on various value-adds like widget customization, access to growth metrics, and support.
A big potential issue I see with this revenue model? Despite being directly tied to value, this model offers no predictability for us or our customers. A popular solution to unpredictable event-based pricing is to figure out the general distribution of customers and create tiers that align to average use. And, maybe that’s where we eventually end up.
But for now, Tapir’s on pricing Rumspringa. You’ll surely forgive us a couple of months experimentation.
(I’m no expert. I’d love to hear your thoughts and suggestions on Tapir’s pricing or B2B SaaS pricing in general. So, have at it in the comments, or just get in touch.)
Footnotes
[*Banana Steaks: derived from the popular expression “Table Stakes”, meaning the basic features you need for a business element to be viable. The counter point, “Banana Steaks,” refers to a completely outlandish proposition in contravention of all logical business practices.]
[**Once I knew that we wanted to take some % of our customer’s subscription fees, I needed to know what an average B2B SaaS Startup charged per month. Surprisingly, I couldn’t find a recent survey of B2B SaaS products along with average pricing (2013 was the closest I could find). So, I put a rough survey together myself. You can download the .xls file for your own use on the Tapir Blog.]
List of 72 B2B SaaS Pricing Plans
